US Economic Week Ahead: The Calm after the Storm

This week’s economic calendar is relatively quiet, especially compared to the hustle and bustle of last week. Monday’s non-manufacturing ISM report starts the week off, followed by Wednesday’s consumer credit report, Thursday’s jobless claims data, and Friday’s US trade statistics and consumer sentiment. The impact of this week’s non-manufacturing ISM report could be somewhat subdued since its release comes after June’s employment report; negating the importance the report’s employment index. But, significant declines or advances in the report’s business activity index could help shift market sentiment. This week’s big headlines, however, will likely be driven by the start of the 2Q09 earnings seasons, with Alcoa set to announce earnings on Wednesday. There is also a G8 summit taking place this week in Italy, which could produce some headlines. Here is this week’s US economic calendar:

Monday July 6^th:

10:00AM: ISM non-manufacturing Index (Risk: Neutral, Market Reaction: Moderate/Marginal): The non-manufacturing ISM index will likely experience its third consecutive monthly rise. The current Bloomberg consensus for the index is 46.7 compared to last month’s reading of 44.0. The market would take any positive surprises to this index as good news echoing better than anticipated data in the manufacturing sector pointing towards a less severe recession. It will also be important to pay attention to non-manuf. ISM’s new order index, which tends to be a forward looking indicator for the primary business activity index. Since June’s employment report has already been released the employment index is essentially a non-factor.

Tuesday July 7^th:

7:45AM: ICSC-Goldman Store Sales (Risk: Downside, Market Reaction: Marginal): This weekly index tracks same store sales at major US retailers, account for roughly 10% of total sales. Given recent data supporting an increasing US saving rates and a worsening employment situation, this index could face some downward pressure. Last week’s number indicated a 1.6% increment in store sales over the previous week.

Wednesday July 8^th:

7:00AM: MBA Purchase Applications (Risk: Neutral, Market Reaction: Marginal): This index, which tracks new mortgage applications tends to be a reasonable forward looking indicator for home sales, but issues including customers filling out numerous applications could skew the index. A recent drop in refinancing activity caused this index to drop 18.9% on a weekly basis last week, while the level of mortgages to purchase new homes dropped by 4.5%.

3:00PM: Consumer Credit (Risk: Downside, Market Reaction: Marginal): Consumer credit has contracted quite severely over the past several months as saving rates rise and banks tighten consumer credit. The current Bloomberg consensus indicates a month over month change of –US$7.5bn compared to –US$15.7bn a month prior—the second biggest drop on record. Given recent deterioration in the employment situation and a drop in consumer confidence we could see this indicator disappoint.

Thursday July 9^th:

Same Store Sales: (Risk: Downside, Market Reaction: Moderate): This monthly release breaks out same store sales data for individual retail chains. Like weekly the ICSC-Goldman Store Sales index, recent data supporting an increasing US savings rate and a worsening employment situation coupled with deep discounts at some stores, will likely place some downward pressure on same store sales.

8:00AM: Federal Reserve Governor Elizabeth Duke: Is speaking at the FDIC's Interagency Minority Depository Institutions National Conference in Chicago. This could create some headlines.

8:30AM: Initial Claims (Risk: Neutral, Market Reaction: Significant): The current Bloomberg consensus forecast for initial claims is 610K versus last week’s number of 614K. It is likely that after Thursday’s disappointing employment data the market will become more sensitive to changes in claims, as it is an excellent forward looking indicator toward payroll data. I anticipate both initial and continuing claims data will improve as the month progresses.

Friday July 10^th:

8:30AM: International Trade (Risk: Neutral, Market Reaction: Marginal/Moderate): The current Bloomberg consensus for the US trade balance is –US$28.8bn versus last month’s reading of –US$29.2bn. Recent increments in oil prices could add to the current deficit, while placing upward pressure on the import price index.

9:55AM: Consumer Sentiment (Risk: Neutral, Market Reaction: Marginal/Moderate): The current consensus on Bloomberg for the Reuters/University of Michigan Consumer Sentiment Index stands at 71.5 versus last month’s result of 70.8. The sentiment index is broken up into two parts, current conditions and future expectations. Investors are likely to focus more on this report after last week’s disappointing consumer confidence number. A positive or negative surprise in this index could impact the day’s trading.

10:00AM: Treasury Secretary Tim Geithner: Is set to testify before the House Financial Services and Agriculture Committees on derivatives regulation. This could create some headlines.

Have a good weekend!

Week Ahead: The Potential to be a Downer

As I expected the Fed cut rates by 75bp. However, we did see Governor Plosser and Fisher dissent on the decision, both wanting smaller cuts. This is interesting news because I now believe we may be closer to the end of the current rate cut cycle than I originally thought. This may be good news for the Fed. Recently, there has been a lot of chatter in the markets over the US encountering a possible liquidity trap, like that in Japan. However, with the two dissentions on Tuesday’s vote markets are now pricing in a lower probability of more significant rate cuts at April’s meeting, meaning the Fed may have found a way to reduce or end the current rate cut cycle, before rates became low enough to invoke a liquidity trap, and importantly, without disappointing market expectations. You can see from the chart below that after Tuesday’s announcement market expectations shifted to a 2.00% fed funds rate vs. 1.50% prior to the announcement.

The Cleveland Fed's Implied Probabilities for the April meeting outcomes as shown that the magnitude of the expected rate change has declined significantly

Source: Cleveland Fed

This week has the potential to bring some negative consumer focused news to the market place. It is likely GDP will be revised downwards, housing numbers will continue to disappoint, and PCE will help convince a few more people a recession has arrived. We are not sure if the market will have enough upside momentum to keep up last week's gains through-out this week. For those of you looking at global markets, make sure you keep an eye on Taiwanese markets which are set to rally after the big victory of the ‘China friendly’ party in the country’s Presidential elections.

Let’s take a look at the some of the important indicators coming out this week in the US :

Monday March 24th:
10:00AM: Existing Home Sales (Risk: Downside) The Bloomberg consensus survey indicates the market is currently anticipating a reading of 4.85mn units, this would be slightly lower than last month’s 4.89mn reading. There hasn’t been much good news in any of the housing market indicators, and considering the difficulty in acquiring home loans I do not see much upside. We should continue to see inventories increase, and prices falling.

Tuesday March 25th: Fed Day!
10:00AM: Consumer Confidence (Risk: Neutral)- According to Bloomberg.com the market is currently expecting a reading of 73.0 vs. 75.0 last month. We have already seen a substantial drop in the confidence numbers and imagine it will stay around these levels for some time. Minor changes in the Consumer Confidence numbers are not overly important. However, what is important is large swings, such as the major drop we have experienced at the beginning of this year.

Wednesday March 26th:
8:30AM: Durable Goods Orders (Risk: Downside)- According to Bloomberg.com the market is currently expecting a reading of 0.7% m/m vs. -5.3% m/m previously. We have seen continued weakness in the manufacturing sector and imagine this weakness will be reflected in the durable goods number.

10:00AM: New Home Sales (Risk: Downside)- According to Bloomberg.com the market is currently expecting a reading of 575K vs. 588K previously. For the same reasons as Existing Home Sales outlined above.

Thursday March 27th:
8:30AM: GDP Final (Risk: Downside)- According to the consensus survey the market is expecting a reading of 0.6%q/q SAAR, or no change from the preliminary reading. However, I believe there could be more downside in this number than upside and thus believe there is a chance the number could somewhat disappoint.

8:30AM: Jobless Claims (Risk: Neutral)- According to the consensus survey the market is expecting a new jobless claims of 370K,vs. 378k last week. I still continue to monitor this release as one of the most important for the employment situation.

Friday March 28th:
8:30AM: Personal Income and Outlays (Risk: Downside)- According to the consensus survey the market is expecting 0.3%m/m and 0.1%m/m for personal income and personal outlays, respectively. Rising energy and food prices in February will likely eat into the consumer spending figures out pacing the rise in personal income. Remember, about 70% of US GDP is based on consumer spending.

10:00AM: Consumer Sentiment (Risk: Neutral)- According to the consensus survey the market is expecting a reading of 70.0 for consumer sentiment vs. 70.8 last month. After experiencing a large downward swing at the beginning of this year I expect sentiment to stay around this level for the time being.